The overall US economy may be lukewarm, but it's hot times in the industrial real estate market.
A new report from real-estate brokerage firm Cushman & Wakefield says that 70.1 million square feet of industrial space - most of it distribution centers - was leased in the US in the second quarter of 2016, the most in over 30 years of data and up 6% from the same quarter last year.
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That means year-to-date absorption has 132.2 million square feet. Remarkably, 38 US markets saw more than one million square feet of absorption during Q2 2016, and 11 markets actually registered more than two million square feet of quarterly net occupancy growth.
The top 10 strongest markets for Q2 2016 in terms of demand for industrial/warehouse space were the Inland Empire, with 8.2 million square feet (msf) of absorption; Chicago (7.3 msf); Dallas/Ft. Worth (4.5 msf); Atlanta (3.6 msf); Greenville, South Carolina (3.6 msf); the Pennsylvania I-81/I-78 distribution corridor (3.6 msf); Indianapolis (2.7 msf); Phoenix (2.2 msf); Central New Jersey (2.2 msf); and the East Bay (2.2 msf).
In a separate report, broker CBRE said warehouse availability declined to just 8.8% in Q2. That also marked the 25th consecutive quarter of decreasing availability, extending the longest stretch on record.
Thirty-seven markets followed by CBRE reported declining availability during the quarter, ten remained unchanged, and 13 reported increases.
"There are few signs of stress in the industrial market's fundamentals, despite an uncertain economic and geopolitical environment," CBRE noted.
Declines in availability rates are widespread, CBRE noted, and said that a handful of markets are experiencing their tightest conditions in decades. Markets with the largest declines in availability from year-earlier levels were West Palm Beach (-290 "basis points" meaning 2.9 percentage points), Newark (-270 bps), Memphis (-270), Tampa (-250 bps), Jacksonville (-250 bps) and Detroit (-250 bps).
Meanwhile, Houston, Cincinnati, Denver, Minneapolis, Riverside, South Central PA, Cleveland and Honolulu moved in the other direction, recording availability rates higher than those at this time last year.
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The full list of availability for major US metro markets is shown in the long graphic below.
Source: CBRE
But the CBRE report added that "With the [facility] development cycle promising to remain flush over the next few years, we expect these declines in availability to slow or reverse as new supply is delivered to the market."
Retailers have been renting DCs space faster than developers can build it, as they race to build facilities to fulfill surging ecommerce orders. The latest trend of opening smaller distribution centers near cities to improve delivery times and accept returns is driving vacancy rates into the low single digits in some areas, the reports both say.
Soaring demand is also driving up rents. Cushman & Wakefield estimated that industrial rents increased in 68 of 79 major U.S. markets, rising at an overall rate of 4.1% since the same period last year. What's more, more than 25% of the US has seen now double-digit gains in lease rates
Cushman & Wakefield say that in many markets, industrial rents are now at historic highs and that on a national level, the US is witnessing rental rate appreciation for every industrial product type.
Have a lease coming up for renewal soon? In most markets you can expect a sharp increase in rates.
Looks like warehouses are where the money is right now.
Are you seeing rising rates and tight availability in the markets where you operate? Let us know your thoughts at the Feedback section below.
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